BILLY J. "B.J." PINTER, ET AL., PETITIONERS V. MAURICE DAHL, ET AL. No. 86-805 In the Supreme Court of the United States October Term, 1987 On Writ of Certiorari to the United States Court of Appeals for the Fifth Circuit Brief for the Securities and Exchange Commission as Amicus Curiae TABLE OF CONTENTS Questions presented Interest of the Securities and Exchange Commission Statement Summary of argument Argument: I. The in pari delicto defense is available in limited circumstances in an action under Section 12(1) of the Securities Act A. The in pari delicto defense is available in actions under Section 12(1) B. In a Section 12(1) action against the issuer, the in pari delicto defense should be available where (1) the plaintiff is primarily a promoter of, rather than an investor in, the securities offering, and (2) the plaintiff bears at least substantially equal responsibility for the issuer's failure to register the securities or for the decision to conduct the offering in a manner that required registration II. A person other than the person who passes title to the security may be liable under Section 12(1) only if he solicited the buyer's purchase of the security, i.e., urged the buyer to purchase the security, motivated in significant part either by his own financial interests or by those of the security owner III. SEC law enforcement actions for violations of the registration provisions may be brought against persons who are not liable in private actions under Section 12(1) Conclusion QUESTIONS PRESENTED 1. Whether, and under what circumstances, the defense of in pari delicto bars a claim under Section 12(1) of the Securities Act of 1933, 15 U.S.C. 77l(1), for the unlawful sale of unregistered securities. 2. Whether a person must have sought or received a financial benefit in order to be liable under Section 12(1). INTEREST OF THE SECURITIES AND EXCHANGE COMMISSION The Securities and Exchange Commission (SEC), is the agency responsible for the administration and enforcement of the federal securities laws, including the Securities Act of 1933, 15 U.S.C. 77a et seq. This case involves questions concerning the availability of relief, and the range of persons liable, under Section 12(1) of the Securities Act, 15 U.S.C. 77l(1), which affords a private remedy of rescission for violations of the registration provisions of that Act. Private actions brought by investors under the securities laws serve as a "'necessary supplement'" to the Commission's own enforcement efforts. Bateman v. Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 310 (1985) (quoting J. I. Case Co. v. Borak, 377 U.S. 426, 432 (1964)). The Commission is concerned that the availability and coverage of the private remedies be properly determined in accordance with congressional intent. The Commission is also interested in ensuring that restrictions on the scope of the private remedy under Section 12(1) are not improperly applied to limit the Commission's own enforcement actions for violations of the registration provisions. STATEMENT Petitioner Billy J. "B.J." Pinter, doing business as Black Gold Oil Company (Pinter), is an oil and gas producer in Texas and Oklahoma (Pet. App. 31). Respondent Maurice Dahl purchased certain securities -- viz., fractional undivided interests in oil and gas leases -- from Pinter (ibid.). Dahl, together with eleven other persons who, at Dahl's urging, also brought such interests from Pinter (id. at 32, 34, 35), filed this action in the United States District Court for the Northern District of Texas, alleging, inter alia, that because the oil and gas interests had not been registered with the Securities and Exchange Commission, the sales violated Section 5 of the Securities Act of 1933, 15 U.S.C. 77e. Plaintiffs claimed that, under Section 12(1) of the Act, 15 U.S.C. 77l(1), they were therefore entitled to rescission of the sales. The issues in this case are (1) whether certain activities of Dahl in connection with the securities sales preclude him from recovery by affording Pinter a valid in pari delicto defense and (2) whether Dahl is himself liable under Section 12(1) to the eleven other plaintiffs (and therefore, the parties assume, subject to a contribution claim against him by Pinter). 1. Respondent Dahl is a California real estate broker and investor (Pet. App. 30). He also invested in oil deals and in 1980 and 1981 formed two closely held corporations to acquire and hold royalty and working interests in oil and gas properties (id. at 31). Dahl hired an oilfield expert to locate oil and gas leases from him (ibid.). The expert introduced Dahl to petitioner Pinter (ibid.), who, according to the brief in opposition to certiorari, had been a licensed oil and gas securities broker-dealer in Texas for 20 years (Br. in Opp. 6). Pinter told Dahl that he could acquire the oil and gas leases Dahl sought (Pet. App. 32). Dahl loaned Pinter $20,000 to do so, with the understanding that the leases would be held in the name of Pinter's Black Gold Oil Company and that Dahl would have a right of first refusal to drill certain wells in the future (ibid.). Pinter found the leases as promised. Dahl toured the properties several times and reviewed the geology and the drilling logs and production history assembled by Pinter (Pet. App. 32). Dahl concluded, in the words of the district court, that "there was no way to lose" (ibid.). Dahl thereupon urged his friends and family /1/ in California to invest in the property by purchasing undivided fractional working interests and oil and gas rights from Pinter (Pet. App. 32). At least eleven such persons, Dahl's co-plaintiffs in this lawsuit, did so (id. at 32-33). Except for Dahl and one other plaintiff, none of the plaintiffs ever spoke to or met Pinter or toured the property (id. at 32, 34). Dahl invested approximately $310,000; the other 11 plaintiffs invested about $7,500 each (id. at 32-33). /2/ Dahl received no commissions or other compensation in connection with their purchases (id. at 34). The oil and gas interests were never registered with the Commission (Pet. App. 33). The purchase agreements stated that the interests were being sold "without the benefit of registration under the Securities Act of 1933, as amended, and on reliance of (SEC) rule 146 thereunder" (Br. in Opp. App. 39). The interests subsequently proved worthless (Pet. 4). 2. Dahl and his eleven co-purchasers brought suit against Pinter. They alleged that Pinter made material misrepresentations regarding the oil and gas properties and his oil experience, thereby entitling them to damages under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder (15 U.S.C. 78j(b); 17 C.F.R. 240.10b-5) and to rescission under Section 12(2) of the Securities Act (15 U.S.C. 77l(2)). They also sought rescission under Section 12(1) of the Securities Act (15 U.S.C. 77l(1)) for the sale of unregistered securities. /3/ In a counterclaim for fraud, Pinter alleged, among other things, that Dahl misrepresented the investment sophistication of himself and the other plaintiffs (Br. in Opp. App. 46-47) and falsely assured Pinter that he would provide the other investors with all information necessary for evaluation of the investment (id. at 48-49). Pinter further alleged that Dahl had agreed to raise the money for the project from these investors and that Pinter would simply be the "operator" of the wells (ibid.). Pinter apparently was contending that Dahl was responsible for the loss of the private-offering exemption from registration under Section 4(2) of the Securities Act, 15 U.S.C. 77d(2). Pinter also asserted, on the basis of the same factual allegations, that Dahl's suit was barred by the equitable defenses of in pari delicto and estoppel (Br. in Opp. App. 45). The district court, after a bench trial, found that the oil and gas interests were not exempt from registration (Pet. App. 37). The court also found the evidence insufficient to sustain Pinter's counterclaim against Dahl (id. at 38). In so finding, the court apparently also rejected the equitable defenses. As a result, the court ruled that the plaintiffs were entitled to rescission pursuant to Section 12(1). /4/ 3. The court of appeals affirmed the district court's judgment (Pet. App. 15). The court first held that Dahl's involvement in the sales to his co-plaintiffs did not give Pinter an in pari delicto or estoppel defense to Dahl's recovery (id. at 9-10, 12). The court's reason for rejecting the in pari delicto defense, apparently, was that the defense is not available in an action under Section 12(1) because that section provides for strict liability rather than liability based on scienter (see Pet. App. 9-10). The court distinguished this Court's recent decision concerning the in pari delicto defense, Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299 (1985), on the ground that Berner was brought under the antifraud provisions of Section 10(b) of the Securities Exchange Act, 15 U.S.C. 78j(b), which does not require proof of scienter (Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976)). /5/ The court next considered whether Dahl was himself a "seller" of the oil and gas interests within the meaning of Section 12(1), for if he was, the court assumed, he could be held liable in contribution for the other plaintiffs' claims against Pinter. /6/ Citing Fifth Circuit precedent, the court stated that a Section 12 "seller" includes not only the owner of the securities but also any person who is a "substantial factor in causing the transaction to take place" (Pet. App. 13). The court had "no difficulty finding that Dahl's conduct was a 'substantial factor' in causing the other plaintiffs to purchase securities from Pinter" (ibid.). Nevertheless, the court declined to hold Dahl a "seller" (ibid.). In the court's view, "a rule imposing liability (without fault or knowledge) on friends and family members who give one another gratuitous advice on investment matters unreasonably interferes with well-established patterns of social discourse" (id. at 14). Accordingly, the court refused to impose liability on Dahl "for mere gregariousness" (ibid.) and concluded that a Section 12 seller must have "received or hoped to receive some financial benefit from his efforts" (ibid.). The court stated, somewhat more broadly, that a Section 12 seller must "be motivated by a desire to confer a direct or indirect benefit on someone other than the person he has advised to purchase" (ibid.). In a dissent, Judge Brown expressed the view that Dahl's conduct "transformed" him into a "seller" of the unregistered securities, thereby "put(ting) him in the same boat as Pinter" (Pet. App. 16). Judge Brown concluded that, because Dahl was a "catalyst" for the entire transaction and knew the securities were unregistered (id. at 19), Dahl's suit should be barred by the doctrine of in pari delicto, and Pinter should be permitted contribution (id. at 19, 23 n.5). The court of appeals denied rehearing en banc by a vote of eight to six (Pet. App. 26). In the dissent from that denial, Judge Jones criticized the decision of the panel majority. In her view, the majority opinion (1) "change(d) the law regarding the definition of a 'seller' of securities" by adding the financial-benefit requirement (ibid.) and (2) improperly refused to apply Berner, apparently on the ground that Berner is limited to fraud actions (Pet. App. 27). This Court granted Pinter's petition for a writ of certiorari on April 20, 1987. SUMMARY OF ARGUMENT Liability under Section 12(1) of the Securities Act is "in terrorem," intended "to guarantee that the risk of (its) invocation will be effective * * * " (Douglas & Bates, The Federal Securities Act of 1933, 43 Yale L.J. 171, 173 (1933) (footnote omitted; emphasis in original)). Under the section, a person who offers or sells a security in violation of the registration provisions of the Act is strictly liable in rescission to a person who purchased from him. The strict liability nature of the statute requires, on the one hand, that common law or equitable defenses rarely be available to wrongdoers and, on the other hand, that the statute be carefully construed so as not to impose liability on persons other than those intended by Congress. 1. The court of appeals held, apparently on the basis of the statute's imposition of strict liability, that the in pari delicto defense should almost never be available in actions under Section 12(1). The principal rationale for the in pari delicto defense, however, is that even where the defendant is a wrongdoer there are certain circumstances where, because of the plaintiff's own wrongdoing, deterring the plaintiff's misconduct by precluding suit better serves the statutory purposes than deterring the defendant's misconduct by allowing recovery. This rationale applies to actions under Section 12(1), though in fairly narrow circumstances. The Commission believes that suit against the issuer under Section 12(1) should be barred by the in pari delicto defense where (1) the plaintiff is himself primarily a promoter of, rather than an investor in, the securities offering, and (2) the plaintiff bears at least substantially equal responsibility for the issuer's failure to register the securities or for the decision to conduct the offering in a manner that required registration. 2. With respect to the range of persons liable under Section 12(1), the Commission believes that a person other than the person who passed title to the securities may be held liable under Section 12(1), but only if he solicited the buyer's purchase, i.e., urged the buyer to purchase, motivated in significant part either by his own financial interests or by those of the owner. In such circumstances, it is fair to say, in the words of Section 12, that the buyer "purchas(ed the) security from him." The Commission agrees with the court of appeals that Congress could not have intended that a person would be subject to strict liability for rescission merely because he attempted to be helpful to a friend by urging -- even strongly or enthusiastically -- that the friend make a securities purchase. The Commission disagrees with the court of appeals' underlying reasoning -- developed in prior cases in that court -- that Section 12 imposes liability on any person who is a "substantial factor" in the sale in question. Rather, liability may be imposed under Section 12 on only two categories of persons: those who own the security and pass title to the purchaser, and those who solicit the purchase. Persons who are not liable for rescission under Section 12 may nonetheless be appropriate defendants in suits brought by the Commission under Section 5. Commission actions do not require a completed sale and are not limited by the language in Section 12 that restricts liability to those persons from whom the buyer purchased the security. The class of persons who may be said to "offer or sell" a security in violation of Section 5 is broader than the class of persons "from" whom the buyer "purchased" a security. In addition, the Commission is authorized by statute to bring an action against persons who "directly or indirectly" violate the registration provisions. Finally, as a matter of policy, injunctive relief (the principal relief in Commission actions) should be available against collateral participants who should not be liable for rescission. ARGUMENT I. THE IN PARI DELICTO DEFENSE IS AVAILABLE IN LIMITED CIRCUMSTANCES IN AN ACTION UNDER SECTION 12(1) OF THE SECURITIES ACT A. The In Pari Delicto Defense Is Available In Actions Under Section 12(1) In Bateman Eichler, Hill Richards, Inc. v. Berner, 472 at 310-311, this Court addressed the availability of the in pari delicto defense in an action brought under the antifraud provisions of Section 10(b) of the Securities Exchange Act, 15 U.S.C. 78j(b), and Rule 10b-5, 17 C.F.R. 240.10b-5. The Court held the defense available in narrow circumstances: "where (1) as a direct result of his own actions, the plaintiff bears at least substantially equal responsibility for the violations he seeks to redress, and (2) preclusion of suit would not significantly interfere with the effective enforcement of the securities laws and protection of the investing public" (472 U.S. at 310-311). The court of appeals in the present case refused to apply the Berner standard. The court noted that Berner involved in an action requiring proof of scienter, whereas the present action involves Section 12(1), which imposes liability without regard to fault. Although its reasoning is far from clear, the court apparently concluded that the in pari delicto defense is not applicable in actions based on strict liability. /7/ Indeed, according to the dissent, the majority suggested that "the general in pari delicto rules espoused * * * (in Berner) are limited to a Section 10(b) action * * * " (Pet. App. 21-22 n.4). Contrary to the view of the court of appeals, there is no reason to limit the in pari delicto defense to actions requiring proof of scienter. The defense has traditionally been applied to any action based on conduct that "transgresses statutory prohibitions * * * " (2 Restatement of Contracts Section 598 comment a (1932)). /8/ Moreover, the doctrine of in pari delicto rests on the premise that, in certain circumstances, "denying judicial relief to an admitted wrongdoer is an effective means of deterring illegality" (Berner, 472 U.S. at 306 (footnote omitted)). See also McMullen v. Hoffman, 174 U.S. 639, 669-670 (1899). The need to deter illegality on the part of the plaintiff is not eliminated simply because the statute making the parties' conduct illegal imposes strict liability rather than requiring intentional or negligent wrongdoing. Regardless of the standard of conduct, there are circumstances in which the statutory objective of deterring illegal conduct is better served by precluding suit than by allowing it. The courts have not limited the in pari delicto defense to actions based on statutes requiring proof of scienter. The defense has been recognized in cases involving other strict-liability statutes. See, e.g., Ufitec, S.A. v. Carter, 20 Cal. 3d 238, 249-250, 571 P.2d 990, 996-997, 142 Cal. Rptr. 279, 285-286 (1977) (action for violation of Federal Reserve margin requirements); Miller v. California Roofing Co., 55 Cal. App. 2d 136, 130 P.2d 740 (1942) (sale of stock without permit from state corporation commission); Ryan v. Motor Credit Co., 130 N.J. Eq. 531, 23 A.2d 607 (Ch. 1941), aff'd, 132 N.J. Eq. 398, 28 A.2d 181 (1942) (violation of usury laws). /9/ And most courts have recognized it in cases brought under Section 12(1) itself. Although there are relatively few reported decisions under Section 12(1) that involve the in pari delicto defense, and although the defense has rarely succeeded on the facts of particular cases, courts of appeals other than the court below -- indeed, even other decisions of the Fifth Circuit -- have recognized that the defense is available. See Can-Am Petroleum Co. v. Beck, 331 F.2d 371, 373-374 (10th Cir. 1964); Katz v. Amos Treat & Co., 411 F.2d 1046, 1054 (2d Cir. 1969); Woolf v. S. D. Cohn & Co., 515 F.2d 591 (5th Cir. 1975), vacated on other grounds, 426 U.S. 944 (1976); Malamphy v. Real-Tex Enterprises, Inc., 527 F.2d 978 (4th Cir. 1975); Lawler v. Gilliam, 569 F.2d 1283 (4th Cir. 1978); Wolfson v. Baker, 623 F.2d 1074 (5th Cir. 1980), cert. denied, 450 U.S. 966 (1981). Commentators too have suggested that the defense should be available under the proper circumstances in actions under Section 12(1). /10/ B. In A Section 12(1) Action Against The Issuer, The In Pari Delicto Defense Should Be Available Where (1) The Plaintiff Is Primarily A Promoter Of, Rather Than An Investor In, The Securities Offering, And (2) The Plaintiff Bears At Least Substantially Equal Responsibility For The Issuer's Failure To Register The Securities Or For The Decision To Conduct The Offering In A Manner That Required Registration The bounds of the in pari delicto defense in actions under the securities laws generally, and in actions under Section 12(1) in particular, should be narrowly drawn. See Berner, 472 U.S. at 309-310; Perma Life Mufflers, Inc. v. Int'l Parts Corp., 392 U.S. 134, 138 (1968). The registration requirements are the heart of the 1983 Act, and Section 12(1) imposes strict liability for violating those requirements. The threat of liability under Section 12(1) is an important enforcement tool. Since unregistered offerings * * * do not generally attract the attention of regulatory agencies before sale, private suits play a particularly important role in the enforcement of the registration requirement. "(I)n many instances, particularly those involving relatively small distributions, the private suit is the only effective means of detecting and deterring wrongdoing on the part of issuers and their agents or underwriters who have not registered the securities being offered for sale." Lawler v. Gillian, 569 F.2d 1283, 1293 (4th Cir. 1978) (quoting Woolf v. S.D. Cohn & Co., 515 F.2d at 605). /11/ To give this statutory enforcement mechanism its full intended effect, the in pari delicto defense must be limited to those situations where precluding suit under Section 12(1) serves the statutory goal more effectively than permitting recovery. See A.C. Frost & Co. v. Coeur D'Alene Mines Corp., 312 U.S. 38, 43-44 (1941). In most cases, the deterrence goal of the statute is best achieved by permitting the suit to proceed. In certain circumstances, however, deterring the plaintiff's misconduct by barring suit better serves the statutory goal than deterring the defendant's misconduct by allowing recovery. As Berner recognized, the defense is thus justified only when two conditions are present: (1) precluding suit would not impair the effective enforcement of the securities laws; and (2) the plaintiff, "as a direct result of his own actions," is at least equally responsible for the violations he alleges. Berner, 472 U.S. at 310-311. These two requirements, as applied to Section 12(1), imply that the in pari delicto defense may defeat recovery only where the plaintiff is more a promoter than an investor and is at least equally responsible for the failure to register or the failure to meet the conditions for an exemption from registration. /12/ 1. Berner's refusal to recognize the in pari delicto defense where doing so would undermine the effective enforcement of the securities laws was consistent with the well-recognized principle that the defense cannot be invoked to defeat recovery by a person who is primarily a member of the class the statute was enacted to protect. Wade, Restitution of Benefits Acquired Through Illegal Transactions, 95 U. Pa. L. Rev. 261, 270 (1947); see A.C. Frost & Co. v. Coeur D'Alene Mines Corp., 312 U.S. at 43 n.2. Section 12(1) is designed to protect investors (312 U.S. at 43; SEC v. Ralston Purina Co., 346 U.S. 119, 124 (1953)). It follows that where the plaintiff is primarily an investor, denying a defense of in pari delicto "will best promote the primary objective of the federal securities laws -- protection of the investing public * * * " (Berner, 472 U.S. at 315). Courts considering the in pari delicto defense in actions under Section 12(1) have allowed the defense where the plaintiff was more a promoter than an investor. For example, in Athas v. Day, 186 F. Supp. 385, 389 (D. Colo. 1960), the court barred recovery after concluding that the plaintiff's own investment was incidental to his active participation in a plan to acquire and distribute unregistered stock to third persons. The court said that "(i)t cannot be successfully contended that (plaintiff) was a victim rather than a participant in the plan to dispose of (unregistered) * * * stock." In contrast, in Can-Am Petroleum Co. v. Beck, 331 F.2d 371 (10th Cir. 1964), the court held that, even where the plaintiff actively participated in the distribution of unregistered securities, his suit under Section 12(1) was not barred when his promotional efforts were incidental to his role as an investor. /13/ Whether a plaintiff is primarily a promoter rather than an investor obviously depends in part on the size of his own purchases compared to those of third parties solicited by him. Compare Can-Am Petroleum Co. v. Beck, supra, with Athas v. Day, supra. Where the plaintiff assists in sales to others in volumes that greatly exceed his own purchases, or that constitute the majority of total sales in the offering, a court may well conclude that the plaintiff was primarily promoting the offering. In that situation, his own conduct will presumably have caused more harm than he himself suffered, and precluding his suit may serve the statutory goals more effectively than allowing him to recover. By contrast, where the plaintiff's own purchases exceed the sales resulting from his promotional efforts, a complete bar to the plaintiff's recovery would work a forfeiture entirely out of proportion to any harm he may have caused and would leave the defendant with the fruits of his violation. /14/ Aside from comparison of securities bought and promoted, another important consideration is whether the plaintiff has arranged an underwriting for the offering or prepared the offering materials: such a plaintiff is likely to be more than a mere investor. 2. Even if the plaintiff is primarily a promoter rather than an investor, the selling issuer should not escape liability unless the plaintiff also bears at least substantially equal responsibility for the violation of the Act. It is the issuer's obligation to register the securities (Section 6(a), 15 U.S.C. 77f(a)), and if the issuer could avoid liability simply by selling to an underwriter for resale, /15/ the deterrent effect of Section 12(1) would be undermined. See Lawler v. Gilliam, 569 F.2d 1283, 1293 (4th Cir. 1978). Moreover, under Berner, the plaintiff is not in pari delicto unless, "as a direct result of his own actions, (he) bears at least substantially equal responsibility" (472 U.S. at 310) for the underlying misconduct. In an action under Section 12(1), this requires that the plaintiff be at least equally responsible for the actions that make the sales of the unregistered securities illegal -- namely, the issuer's failure to register the securities or the decision to conduct the offering in a manner that required registration. Because it is the issuer's responsibility to register the securities, the purchaser's knowledge that the securities are unregistered cannot, by itself, constitute equal fault, as the court of appeals correctly concluded (Pet. App. 11-12). See Woolf v. S.D. Cohn & Co., 515 F.2d at 604; Neuwirth Investment Fund, Ltd. v. Swanton, 422 F. Supp. 1187, 1198 (S.D.N.Y. 1975); Wassel v. Eglowsky, 399 F. Supp. 1330, 1365 (D. Md. 1975), aff'd, 542 F.2d 1235 (4th Cir. 1976). The registration provisions are designed to provide the purchaser with "full disclosure of information * * * necessary to informed investment decisions." See SEC v. Ralston Purina Co., 346 U.S. 119, 124 (1953) (footnote omitted). Barring the investor's recovery under the in pari delicto doctrine, "at least on the basis solely of the buyer's knowledge of the violation, is so foreign to the purpose of the section that there is hardly a trace of it in the decisions under" Section 12. 3 L. Loss, Securities Regulation 1694 (2d ed. 1961) (footnote omitted). /16/ The Commission believes that where, in addition to promoting an offering, the plaintiff, for example, induced the issuer not to register, perhaps to save time or expense, he should not be allowed to obtain Section 12(1) rescission. Similarly, where the plaintiff was at least equally responsible for the decision to make the offering in a manner that required registration -- for example, by offering the shares publicly or as an interstate offering -- the plaintiff's suit should be barred. See Perma Life Mufflers, Inc., 392 U.S. at 148 (emphasis in original) (Fortas, J., concurring) (if the plaintiff "originated and insisted upon the inclusion of a * * * clause" violating the antitrust laws, he "could not recover damages based upon this, if, essentially, it is his own act"). The in pari delicto doctrine is designed to deter precisely this type of conduct: "(p)laintiffs who are truly in pari delicto are those who have themselves violated the law in cooperation with the defendant" (id. at 153 (footnote omitted) (Harlan, J., concurring in part and dissenting in part). /17/ 3. The district court's findings in this case are not adequate to determine whether Dahl (1) was primarily a promoter of the offering and (2) bears at least substantially equal responsibility for the failure to register the securities or for the decision to conduct the offering in a manner that required registration. The district court's findings lend some support to the conclusion of the dissent in the court of appeals that Dahl was a "catalyst" for the offering and the sales to the other plaintiffs: he loaned money to Pinter and urged his associates to purchase the interests. On the other hand, it is unclear whether he was more a promoter than an investor, for he certainly invested substantially more money than his co-plaintiffs, whose participation he solicited. Moreover, the district court made no findings with regard to who was responsible for the failure to register or for the manner in which the offering was to be conducted. We therefore believe that it would be appropriate to remand this case for further findings. II. A PERSON OTHER THAN THE PERSON WHO PASSED TITLE TO THE SECURITY MAY BE LIABLE UNDER SECTION 12(1) ONLY IF HE SOLICITED THE BUYER'S PURCHASE OF THE SECURITY, I.E., URGED THE BUYER TO PURCHASE THE SECURITY, MOTIVATED IN SIGNIFICANT PART EITHER BY HIS OWN FINANCIAL INTERESTS OR BY THOSE OF THE SECURITY OWNER Section 12(1) of the Securities Act makes any person who "offers or sells" a security in violation of the registration requirements liable for rescission to any person "purchasing such security from him." Liability under the provision is not limited to the owner who passed title to the buyer. It also extends to any person who solicited the purchase. A. Section 12(1) provides in pertinent part (emphasis added): Any person who -- * * * offers or sells a security in violation of (Section 5) * * * * * shall be liable to the person purchasing such security from him, who may sue * * * to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, * * * or for damages if he no longer owns the security. The provision defines the class of defendants who may be subject to the specified rescissionary liability /18/ in two stages: first, the defendant must have offered or sold the security; second, among such persons, only a defendant "from" whom the plaintiff buyer "purchased" may be liable. /19/ The statutory definitions of "offer" and "sell" (Section 2(3), 15 U.S.C. 77b(3)) bring within the first class, which sets an outer limit on the range of persons who may be liable under Section 12(1), not only those who pass title but also those who "attempt or offer to dispose of, or (make a) solicitation of an offer to buy, a security." /20/ The second condition of liability under Section 12(1) -- that the plaintiff must have "purchased" the security "from" the defendant -- narrows the class of defendants. One important consequence, entailed by the "from him" language, is that Section 12(1), like Section 12(2) /21/ but unlike Section 11, /22/ imposes liability only on the buyer's "immediate sellers" (Douglas & Bates, supra, 43 Yale L.J. at 177; see also Shulman, supra, 43 Yale L.J. at 243). The purchaser cannot recover from the seller's seller. /23/ Although it must be true of a Section 12(1) defendant that the buyer "purchas(ed the) security from him," that requirement does not restrict liability to the owner of the security. A natural reading of the statutory language would include at least some persons who urged the buyer to purchase. For example, a seller's agent who solicited the purchase would commonly be said, and be thought by the buyer, to be among those "from" whom the buyer "purchased." The First Circuit made essentially this point about the meaning of the statutory langauge (which was then slightly different, see page 22, infra) in a 1940 case concerning the liability of a broker who was acting as an agent of the seller. The court observed that "a selling agent in common parlance would describe himself as a 'person who sells,' though title passes from his principal, not from him (Cady v. Murphy, 113 F.2d 988, 990, cert. denied, 311 U.S. 705 (1940)). If such an agent is fairly described as one who "sells" to the buyer, he is also fairly described as one "from" whom the buyer "purchased." Ibid. The extension of Section 12 liability beyond the person who passes title has been frequently and widely recognized since the passage of the Act. Thus, it has long been "quite clear," as Cady indicates, that when a broker acting as agent of one of the principals to the transaction successfully solicits a purchase, he is a person from whom the buyer purchases within the meaning of Section 12. 3 L. Loss, supra, at 1713. Accord, Johns Hopkins University v. Hutton, 297 F. Supp. 1165, 1208-1209 (D. Md. 1968), rev'd on other grounds, 422 F.2d 1124, 1128 (4th Cir. 1970), cert. denied, 416 U.S. 916 (1974); Boehm v. Granger, 42 N.Y.S.2d 246, 248 (1943), aff'd, 268 A.D. 855, 50 N.Y.S.2d 845 (1944); see also Douglas & Bates, supra, 43 Yale L.J. at 206-207. This view has a firm basis in common law. /24/ And if a broker acting for the seller is liable, there is no reasonable basis for distinguishing various other persons who participate in soliciting the purchase. See 3 L. Loss, supra, at 1716. In Katz v. Amos Treat & Co., 411 F.2d 1046, 1053 (2d Cir. 1969), Judge Friendly explained that a jury could conclude that an attorney working for a brokerage firm was liable under Section 12(1), as "a party to a solicitation," where he repeatedly assured the plaintiff that certain favorable statements about an offering were true. In the circumstances, it could be found that the attorney had placed the brokerage firm in a position "to tackle (the purchaser) for the money." This construction of the "purchasing * * * from him" language of Section 12(1) receives support from the history of the phrase "offers or sells," as it is used in that section. As originally enacted in 1933, the provision stated only that any person who "sells" in violation of Section 5 shall be liable to the person "purchasing * * * from him" (Act of May 27, 1933, ch. 38, Section 12, 48 Stat. 84). But the term "sell" was defined to "include every contract of sale or disposition of, attempt or offer to dispose of, or solicitation of an offer to buy, a security * * * " (Section 2(3), 48 Stat. 74 (emphasis added)). Since "sells" and "purchases" obviously have correlative meanings, the fact that Congress expressly defined "sells" to include one who "solicits" suggests that the class of those from whom the buyer "purchases" may likewise extend to persons who solicit him. Section 12 took its current form by the addition of "offers or" in 1954 amendments to the Act. "Solicitation" is now included only in the statutory definition of "offer" and is no longer included in the statutory definition of "sells." The change in Section 12, however, was merely a technical alteration to conform the provision to changes made for other purposes in Section 5 and in the definitions in Section 2(3). See Act of Aug. 10, 1954, ch. 667, Section 9, 68 Stat. 686. It was intended to preserve the existing law, including the full range of liability provided for by the pre-1954 version. See H.R. Rep. 1542, 83d Cong., 2d Sess. 5, 6, 13-14, 26 (1954); S. Rep. 1036, 83d Cong., 2d Sess. 18 (1954); 3 L. Loss, supra, at 1695-1696. Hence the implication in the original text, recognized by the Cady court in 1940, that the buyer "purchases from" persons who solicit him, retains its original force: there is no reason to think Congress intended to narrow the meaning of "purchased from" when it amended the statute in 1954. The imposition of liability on brokers and others who solicit securities purchases furthers the purposes of the Securities Act. Congress intended that the civil liabilities under the Act be both compensatory and in terrorem. Douglas & Bates, supra, 43 Yale L.J. at 173; Shulman, supra, 43 Yale L.J. at 227. It is important that this in terrorem effect extend to persons who solicit purchases. "The solicitation of a buyer is perhaps the most critical stage of the selling transaction and the stage in which investor protection is especially critical." Schneider, Section 12 of the Securities Act of 1933: The Privity Requirement in the Contemporary Securities Law Perspective, 51 Tenn. L. Rev. 235, 272 (1984) (footnote omitted). B. Although it is well-established that a person may be liable under Section 12(1) even though he was not himself the person who passed title, we agree with the court of appeals that Congress did not intend to impose liability on a person who induces the purchase but whose motivation is to help the buyer. The language and purpose of Section 12(1) suggest that liability should extend only to persons who successfully solicit the purchase, motivated at least in significant part by a desire to serve their own financial interests or those of the owner. The statute restricts liability to those from whom the buyer "purchased." Even when construed in light of the statutory definitions of "offers or sells" (Section 2(3), 15 U.S.C. 77b(3)), which include "solicitation," the "purchased from" language means that not all who propose a securities purchase can be within the reach of Section 12(1). When a person merely urges another -- even strongly or enthusiastically -- to make a securities purchase and his motive is to assist the buyer, it is strained to describe this as "soliciting" or "selling," and it is strained to say that the buyer "purchased" from him. See, e.g., Black's Law Dictionary 1248 (5th ed. 1979); Webster's New International Dictionary (2d ed. 1934) ("solicit" means to "approach with a request or a plea, as in selling, begging, etc.") (emphasis added). In such a situation, Congress could hardly have intended to subject such a person to rescission based on strict liability. As the court of appeals stated, "a rule imposing liability (without fault or knowledge) on friends and family members who give one another gratuituous advice on investment matters unreasonably interferes with well-established patterns of social discourse" (Pet. App. 14). A person who urged the buyer to purchase should, however, be liable when a significant motivation was to serve his own financial interests or those of the owner. If, but only if, he had such a motivation, it is fair to say that the buyer "purchased" the security from him and to align him with the owner in a rescission action. Typically, as the court of appeals believed, a person who solicits the purchase will have sought or received a personal financial benefit from the sale, such as where he "anticipat(es) a share of the profits" (Lawler v. Gilliam, 569 F.2d at 1288) or receives a brokerage commission (see Cady v. Murphy, 113 F.2d at 990). But a person who solicits the buyer's purchase in order to serve the financial interests of the owner may properly be liable under Section 12(1) without a showing that he expects to participate in the benefits the owner enjoys. Contrary to the suggestion of the dissent in the court of appeals (Pet. App. 18 n.3), the financial benefit requirement is not necessarily satisfied merely because, by inducing other persons to buy, a buyer reduces his own risk. When there exists strong investor demand for an offering, a buyer can hardly be said to have benefited financially merely by inducing one group of potential investors, such as his friends and relatives, to purchase interests that otherwise would be purchased by other persons. Nor could such a benefit be present when the Section 12(1) defendant has the financial ability and actual desire to purchase the additional shares himself but, out of generosity, urges his friends and relatives to buy, even though their purchases reduce his own risk. On the other hand, where it can be shown that the Section 12(1) defendant seeks other purchasers because he is unwilling to put more of his own money at risk in the investment and, absent such additional purchases, the offering might not suceed, then the financial benefit requirement would, we believe, be satisfied. C. In this case, it is not clear whether Dahl had the sort of interest in the sales to others that should make him liable as a seller. The dissent argued that Dahl received a financial benefit from his friends' purchases: "More investors means that the investment program receives the requisite amount of financing at a smaller risk to each investor" (Pet. App. 18 n.3). The majority's opinion did not mention this asserted "benefit," which, as we have suggested, cannot be sufficient by itself. But Dahl did more than simply purchase securities and urge purchases by his friends, relatives, and colleagues: he participated in significant ways in initiating the entire investment. Neither the court of appeals nor the district court made findings that focused on whether Dahl urged the other purchases in order to further some financial interest of his own or of Pinter's. Under these circumstances, a remand for further findings would be appropriate. D. In the present case, aside from the question whose interests he was serving when he urged his co-plaintiffs to purchase the securities, Dahl clearly solicited their purchases. See Pet. App. 34. Accordingly, it is not necessary in this case to resolve the question whether Section 12(1) liability extends to persons who are less actively involved in the selling process -- to all persons who are "substantial factor(s) in causing the transaction to take place," as the court of appeals suggested (Pet. App. 13), or, as other courts have held, to all "aiders and abettors." /25/ Nevertheless, because the court of appeals articulated the broader "substantial factor" test in determining Dahl's Section 12(1) liability, the Commission believes it appropriate to explain why, in its view, that test is too broad. There is no support in the statutory language for expansion of Section 12 rescissionary liability beyond persons who pass title and persons who "offer," including those who "solicit" offers; nor do we know of any support for the expansive view in the legislative history. Moreover, such expanded liability goes very far beyond the traditional scope of the remedy of rescission. /26/ Section 12 liability is based not on scienter but rather on strict liability (Section 12(1)) or negligence (Section 12(2)). Yet, at common law, the rule was that, in the absence of privity, persons were liable only where they acted with scienter. See, e.g., Ultramares Corp. v. Touche, 255 N.Y. 170, 174 N.E. 441 (1931) (Cardozo, C.J.) (refusing to hold an accountant liable for negligence to an investor or shareholder with whom he was not in privity). While Congress plainly intended that Section 12 depart in various respects from the common law remedy, /27/ such departures were carefully defined in the statute. /28/ The court of appeals' broad theory could have striking consequences. Both the "substantial factor" test and the aiding-and-abetting principle might expose securities professionals, such as accountants and lawyers, whose sole involvement is the performance of professional services and who have no contact with the purchasers, to Section 12 liability for rescission without proof of scienter. /29/ The buyer does not, in any meaningful sense, purchase the security from such persons. In the absence of any expression of congressional intent to override the common law -- and no such intent can be found -- persons other than the owner who do not solicit should not be subject to liability under Section 12. /30/ III. SEC LAW ENFORCEMENT ACTIONS FOR VIOLATION OF THE REGISTRATION PROVISIONS MAY BE BROUGHT AGAINST PERSONS WHO ARE NOT LIABLE IN PRIVATE ACTIONS UNDER SECTION 12(1) Although, in our view, being a "substantial factor" in or "aiding and abetting" an unregistered sale of securities is not sufficient to render a defendant liable under Section 12(1), such a defendant may well be subject to a law-enforcement action, brought by the Commission, alleging violation of the registration requirements of Section 5. Because of significant differences between Commission actions under Section 5 and private Section 12(1) actions, the Commission may obtain relief against a broad range of persons, including aiders and abettors, who neither pass title nor engage in solicitation. /31/ Although both Section 5 and Section 12 speak in terms of offers and sales, there are important differences between the sections. A Section 5 violation does not require a completed sale at all, and a Commission action is not subject to the restrictive language of Section 12 that limits liability to the persons "from" whom the buyer purchased. Because Section 5 does not view the matter from the buyer's perspective, as Section 12 does, some persons who help bring about a securities offering may fairly be said to have engaged in an offer or sale of a security (within the meaning of Section 5), even if they cannot be said to have sold it to a particular buyer (within the meaning of Section 12). Moreover, whereas Section 12 requires that the person actually offer or sell the security, Section 5 broadly makes it unlawful for any person "directly or indirectly" to offer or sell unregistered securities. See, e.g., SEC v. Holschuh, 694 F.2d 130, 140 (7th Cir. 1982). Thus, Section 5, unlike Section 12, by its terms covers the conduct of persons other than those who directly offer or sell. The differences in applicable statutory language reflect the difference in remedies between a private Section 12 action and a Commission action. Unlike a private action under Section 12, a Commission action is not derived from common-law rescission, which, as we have explained, limits the range of persons liable. Moreover, it is appropriate that injunctive relief against future violations -- the most common remedy in Commission actions -- should be available against collateral participants who should not be liable for rescission. See SEC v. Coven, 581 F.2d 1020, 1027-1028 (2d Cir. 1978) ("The essential nature of an SEC enforcement action is equitable and prophylactic; its primary purpose is to protect the public against harm * * * ."), cert. denied, 440 U.S. 950 (1979); see also SEC v. Murphy, 626 F.2d 633, 649 n.17 (9th Cir. 1980). /32/ As a result of these distinctions, well-developed case law has established that a broader range of persons may be liable, on both primary and secondary liability principles, in Commission actions under Section 5 than may be liable in private actions under Section 12. As to primary liability, the Commission may take action under Section 5 against "those who are engaged in steps necessary to the distribution of security issues." SEC v. Chinese Consolidated Benevolent Ass'n, Inc., 120 F.2d 738, 741 (2d Cir.), cert. denied, 314 U.S. 618 (1941). Thus, "those who had a necessary role in the transaction are held liable as participants" (SEC v. Murphy, 626 F.2d 633, 650-651 (9th Cir. 1980) (footnote omitted)). See SEC v. Holschuh, supra; SEC v. Int'l Chemical Development Corp., 469 F.2d 20, 28 (10th Cir. 1972). Under this "participant" theory, persons who neither are in privity nor solicited a purchase are proper defendants in Commission actions. See, e.g., SEC v. Holschuh, supra. As to secondary liability, the Commission has frequently charged as aiders and abettors persons who, although they are collateral actors in the selling process, are aware of and substantially assist in the violation. See SEC v. Murphy, 626 F.2d at 651 n.20 (citing cases); see generally Ruder, supra, 120 U. Pa. L. Rev. at 645-646. /33/ For example, an official and major shareholder in a brokerage firm who exercised various management functions was found liable as an aider and abettor of his firm's violations of Section 5. SEC v. National Bankers Life Ins. Co., 324 F. Supp. 189, 196 (N.D. Tex. 1971). We urge that the Court make clear that application of a broad test for primary liability and the availability of secondary liability in Commission enforcement actions under Section 5 are unaffected by a holding as to the scope of private actions under Section 12. CONCLUSION The judgment of the court of appeals should be vacated, and the case should be remanded for further proceedings. Respectfully submitted. CHARLES FRIED Solicitor General LOUIS R. COHEN Deputy Solicitor General RICHARD G. TARANTO Assistant to the Solicitor General DANIEL L. GOELZER General Counsel PAUL GONSON Solicitor JACOB H. STILLMAN Associate General Solicitor THOMAS L. RIESENBERG Special Counsel MAX BERUEFFY Attorney Securities and Exchange Commission JULY 1987 /1/ According to the brief in opposition, these persons included Dahl's fiancee, his brother, his accountant, his partner in a construction business, the bank officer handling his construction loans, his construction financier, his construction-business insurance agent, and other businessmen whom Dahl had known "since * * * grammar school" (Br. in Opp. 5, 8). /2/ Persons other than the plaintiffs also purchased interests from Pinter (see Pet. App. 32-33). /3/ In addition, the plaintiffs asserted pendent claims under Texas and California law (Pet. App. 36). /4/ In view of its decision under Section 12(1), the court did not decide the Section 12(2) claim (Pet. App. 37-38). The court rejected the claim under Section 10(b) and Rule 10b-5 on the ground of Pinter's lack of scienter (Pet. App. 35). /5/ The court also rejected Pinter's estoppel defense (Pet. App. 12). That ruling is not challenged in this Court. /6/ It is not clear whether the contribution issue was properly before the court of appeals. Pinter never filed a claim for contribution, although he did seek, and was denied, permission to realign Dahl as a third-party defendant. We assume that the question of Dahl's liability under Section 12(1) is properly presented in this Court. /7/ The court of appeals would permit the in pari delicto defense in a Section 12(1) action where the plaintiff's conduct is "'offensive to the dictates of natural justice'" (Pet. App. 9-10 (citation omitted)). Since the gravamen of a Section 12(1) violation is a failure to register securities, it is hard to imagine a plaintiff's conduct that is both directly related to that failure (as Berner requires (see 472 U.S. at 310)) and, at the same time, offends "the dictates of natural justice." Accordingly, we read the court's opinion essentially to preclude the defense in Section 12(1) actions. The question presented in the petition is "(w)hether the common law in pari delicto defense is available in a private action for rescission of the sale of unregistered securities brought under Section 12(1)" (Pet. i). /8/ See generally 14 S. Williston, A Treatise on the Law of Contracts Sections 1628, 1629 (3d ed. 1972); Comment, 53 Minn. L. Rev. 827, 828 (1969) (footnote omitted) ("In pari delicto * * * denies recovery * * * to an active participant in an illegal or morally delinquent scheme."). /9/ In product liability cases, where liability may also be imposed without regard to fault, the courts have long weighed the relative responsibility of the defendants in the chain of distribution in order to resolve their indemnity claims. See, e.g., Rabatin v. Columbus Lines, Inc., 790 F.2d 22 (3d Cir. 1986); Chamberlain v. Carborundum Co., 485 F.2d 31, 34 (3d Cir. 1973). /10/ See, e.g., Ruder, Multiple Defendants in Securities Law Fraud Cases: Aiding and Abetting, Conspiracy, In Pari Delicto, Indemnification, and Contribution, 120 U. Pa. L. Rev. 597, 662-663 (1972); Comment, Plaintiff's Conduct as a Bar to Recovery Under the Securities Acts: In Pari Delicto, 48 Tex. L. Rev. 181, 192-194 (1969); Note, In Pari Delicto Under the Federal Securities Laws: Bateman Eichler, Hill Richards, Inc. v. Berner, 72 Cornell L. Rev. 345, 362 (1987). /11/ Section 12(1)'s deterrent effect is, to a great extent, achieved by the one-year statute of limitations, which allows the purchaser of unregistered securities to keep his securities and reap his profit if the securities perform well during the year, but to rescind the sale if they do not. Thus, the concern expressed by the dissent in the court of appeals, that disallowing in pari delicto permits purchasers to "plac(e) themselves in a no-lose situation" (see Pet. App. 24) is not justified: that is the design of the statute. See Shulman, Civil Liability and the Securities Act, 43 Yale L. J. 227, 246-247 (1933); accord, 3 L. Loss, Securities Regulation 1777 n.326 (2d ed. 1961 & Supp. 1962); see also Straley v. Universal Uranium & Milling Corp., 289 F.2d 370 (9th Cir. 1961) (Where purchasers learned of a violation of the registration provisions within two months after their purchase, but waited to bring an action under Section 12(1) until the day before the statute of limitations ran to see whether the action would be to their advantage, suit was not barred by the equitable doctrine of laches.). /12/ There may also be cases where, although in pari delicto does not apply, equitable estoppel may bar the plaintiff's recovery. See 3 J. Pomeroy, A Treatise on Equity Jurisprudence Section 803, at 187 (5th ed. 1941). For example, in The Value Line Fund, Inc. v. Marcus, (1964-1966 Transfer Binder) Fed. Sec. L. Rep. (CCH) Paragraph 91,523, at 94,953 (S.D.N.Y. Mar. 31, 1965), the plaintiff, an experienced investment advisor, assured the defendant-seller that he had thoroughly examined the company's records and would hold unregistered securities for investment only. The court therefore held that the plaintiff was estopped from denying that the sale was a private offering, stating that "(t)o hold otherwise would allow plaintiffs to profit from their own wrong and at the expense of an innocent and, indeed, misled party" (id. at 94,971). As previously noted (note 5, supra), in the present case, the question of estoppel has not been presented in this Court. /13/ In Can-Am, the plaintiff, in addition to purchasing unregistered interests in oil and gas wells, also "enthusiastically and successfully" urged others to do so as well. For her promotional efforts, the plaintiff received an additional interest in the oil leases. 331 F.2d at 373. The court rejected the defendant's claim that the plaintiff's participation placed her in pari delicto, stating that, although her role as a "pure investor" was "adulterated when she actively assisted in selling (to) others" (ibid.), she nevertheless was primarily an investor and therefore was not barred from suing the promoter. See id. at 373-374. /14/ The courts are justly hesitant to bar a plaintiff's recovery on the grounds of in pari delicto when doing so would result in a harsh forfeiture or the unjust enrichment of the defendant. See, e.g., Stoffela v. Nugent, 217 U.S. 499, 501 (1910); Ryan v. K.V.L., Inc., 88 P.2d 836, 840-841 (Wash. 1939); Norwood v. Judd, 93 Cal. App. 2d 276, 209 P.2d 24 (1949); see also Restatement (Second) of Contracts Section 197 & comment b (1981) ("(A) party has no claim in restitution for performance that he has rendered under or in return for a promise that is unenforceable on grounds of public policy unless denial of restitution would cause disproportionate forfeiture."). /15/ Persons who buy securities from an underwriter who has brought them from the issuer may not sue the issuer, because the "purchased from him" language of Section 12 limits liability to the buyer's immediate sellers. See page 20, infra. For that reason, where a Section 12 plaintiff has purchased and resold unregistered securities, rather than assisting in sales to third persons by the defendant, the in pari delicto defense, if allowed, could interfere with investor protection and could, therefore, be inappropriate. In that situation, which is not present here, Section 12 would not permit an action by the second purchaser against the original seller. If the first purchaser's suit were barred, he might not have the money to pay the rescission claims brought against him by the second purchaser. In some such situations, "the enforcement of Section 12(1) * * * can be best promoted within the present framework of the law by allowing each purchaser in the chain of distribution to pursue an action against (his own) seller" (Lawler, 569 F.2d at 1293-1294). The person who purchased from the plaintiff could be protected by imposing a constructive trust on any recovery by the plaintiff. See Lawler, 569 F.2d at 1293 n.6; Katz v. Amos Treat & Co., 411 F.2d at 1054. /16/ In addition, Section 14 of the Securities Act, 15 U.S.C. 77n, prohibits "(a)ny condition, stipulation, or provision * * * waiv(ing) compliance with (the Act) * * * ." A bar to recovery based solely on the plaintiff's knowledge might constitute an indirect waiver of compliance with the Act, in contravention of Section 14. See Meyers v. C & M Petroleum Producers, Inc., 476 F.2d 427, 429 (5th Cir.), cert. denied, 414 U.S. 829 (1973); Can-Am Petroleum Co. v. Beck, 331 F.2d at 373. /17/ In considering the in pari delicto defense in Section 12(1) actions, courts frequently focus on the extent to which the plaintiff and the defendant cooperated in developing and carrying out the scheme to distribute unregistered securities. See, e.g., Katz v. Amos Treat & Co., 411 F.2d at 1054 (considering whether plaintiff "so made himself a part of the basic violation (by concealing the number of purchasers so as to make an offering appear private) that recovery should be denied on the basis of in pari delicto"); Lawler v. Gilliam, 569 F.2d at 1292-1293 (considering whether plaintiff's own offering of unregistered securities in return for unds to be invested in defendant's unregistered securities was in cooperation with defendants); Malamphy v. Real-Tex Enterprises, Inc., 527 F.2d 978 (4th Cir. 1975) (plaintiff, a sales manager in defendant company who used his own purchase of unregistered securities to enhance his ability to sell securities to the public on behalf of defendant, was active participant in illegal scheme and barred from rescinding his own purchases by in pari delicto doctrine). /18/ Section 12 was adapted from common law rescission (3 L. Loss, supra, at 1700), but it also permits damages if the purchaser no longer owns the security. In that respect (and other respects, see note 27, infra), the provision was a change from common law rescission, which provided for restoration of the status quo by requiring the buyer to return what he received from the seller. See generally Shulman, supra, 43 Yale L.J. at 244-245. The change reflected the judgment that the buyer's right to relief should not depend upon "an irrelevant chance phenomenon" such as his disposition of the security (id. at 245). /19/ In addition, Section 15 of the Act, 15 U.S.C. 77o, makes a "controlling person" liable for the Section 12 liability of a controlled person. /20/ Two recent decisions of this Court suggest that the phrase "offers or sells" in Section 12(1) may be read broadly, to reach not only persons who pass title, but also persons who promote the sale. In United States v. Naftalin, 441 U.S. 768 (1979), this Court held that a defendant's placing of sell orders with a number of brokers constituted an "offer or sale of securities." The Court stated that "(t)he statutory terms, which Congress expressly intended to define broadly, * * * are expansive enough to encompass the entire selling process, including the seller/agent transaction" (441 U.S. at 773). In Rubin v. United States, 449 U.S. 424 (1981), the Court held that a pledge of stock as collateral for a bank loan is an offer or sale within the meaning of Section 17(a), 15 U.S.C. 77q(a). Noting the broad definition of sale under Section 2(3), the Court stated that "(i)t is not essential under the terms of the Act that full title pass to a transferee for the transaction to be an 'offer' or a 'sale'" (449 U.S. at 430). /21/ The "offers or sells" language and the "purchasing such security from him" language that governs Section 12(1) also governs Section 12(2), which provides a securities purchaser with a similar rescissionary cause of action for misrepresentations. Courts have not defined the defendant class differently for purposes of Section 12(1) and (2), and we do not believe the statute permits a different construction. See Schillner v. H. Vaughan Clarke & Co., 134 F.2d 875, 878 (2d Cir. 1943) ("(c)learly the word (sell) has the same meaning in subdivision (2) as in subdivision (1) of Section 12"). /22/ Section 11, 15 U.S.C. 77k, imposes civil liability for false or misleading statements or omissions in a registration statement on a carefully defined range of participants in an offering. See note 28, infra. /23/ Courts sometimes refer to this limitation of liability as a privity requirement. See, e.g., Collins v. Signetics Corp., 605 F.2d 110 (3d Cir. 1979). Thus, "in the case of the typical 'firm-commitment underwriting,' the ultimate investor can recover only from the dealer who sold to him. But the dealer in turn can recover over against the underwriter, and the latter * * * against the issuer * * * ." 3 L. Loss, supra, at 1719-1720. /24/ The Cady court cited several common-law decisions providing for an agent's liability for his principal's rescissionary damages. In particular, in Peterson v. McManus, 187 Iowa 522, 172 N.W. 460 (1919), the agent had received the purchaser's payment and forwarded the money to his principal. The court in Peterson reasoned that, "if he (the principal) does not restore, why should not the agent be made to return money that would never have reached the principal if the agent had not, by fraud, induced the one he dealt with to part with the money?" (187 Iowa at 546, 172 N.W. at 469). See also Pridmore v. Steneck, 120 N.J. Eq. 567, 572-573, 186 A. 513, 516 (Ch. 1936), aff'd, 122 N.J. Eq. 35, 191 A. 861 (1937) (citing New Jersey cases); Mack v. Latta, 178 N.Y. 525, 71 N.E. 97 (1904) (citing cases in English courts of equity); Restatement (Second) of Agency Section 339 (1958); Restatement of Agency Section 339 (1933); Restatement of Restitution Section 142 (1937). /25/ See, e.g., Klein v. Computer Devices, Inc., 602 F. Supp. 837, 840-841 (S.D.N.Y. 1985); Hill v. Equitable Bank National Ass'n, 599 F. Supp. 1062, 1083 n.23 (D. Del. 1984) (citing cases); In re Caesars Palace Securities Litigation, 360 F. Supp. 366, 381 (S.D.N.Y. 1973). /26/ See, e.g., Voytovich v. Bangor Punta Operations, Inc., 494 F.2d 1208, 1211 (6th Cir. 1974); Gordon v. Burr, 506 F.2d 1080, 1083 (2d Cir. 1974). See generally 3 A. Corbin, Corbin on Contracts Section 613 (1960); 5 id. Section 1104 (1964). /27/ Congress expressly changed the common law remedy of rescission to make available damages when the buyer no longer owns the security (see note 18, supra). In addition, the Section 12(2) plaintiff, unlike the buyer seeking common law rescission, is not required to prove reliance on the misstatement or omission. Congress also altered the common law to provide the Section 12(2) defendant with the defense, as to which he bears the burden of proof, that he was excusably ignorant of the untruth or omission. Further, in Section 13 of the Act, 15 U.S.C. 77m, Congress imposed a statute of limitations, thus replacing the doctrine of laches at common law. See generally 3 L. Loss, supra, at 1704-1705; Shulman, supra, 43 Yale L.J. at 243-244. /28/ Congressional care in defining liability is also reflected in Section 11, 15 U.S.C. 77k. That section provides a cause of action for damages in favor of a person acquiring securities pursuant to a registration statement that misstates or omits a material fact. Section 11(a) sets forth precisely the various categories of persons who are subject to suit under Section 11, and Section 11(f) provides rights of contribution for the multiple defendants. The fact that Congress included no similar provisions in Section 12, and merely provided that a person who "offers" or "sells" a security shall be liable to the "person purchasing such security from him," is further indication that a broadening of the scope of Section 12 is inconsistent with the congressional intent. /29/ See, e.g., Excalibur Oil, Inc. v. Sullivan, 616 F. Supp. 458, 466 (N.D. Ill. 1985) (where attorney provided title opinion but did not "solicit" or "induce" purchase, and, in fact, plaintiff "had been 'sold' on the desirability of the investment before it ever met (defendant attorney)," attorney nonetheless held liable under Section 12(2)); Sandusky Land, Ltd. v. Uniplan Groups, Inc., 400 F. Supp. 440, 442-444 (N.D. Ohio 1975) (where an accounting firm allegedly issued false opinions, firm held subject to liability under Section 12(2)); but see Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490, 494 (7th Cir. 1986) (affirming summary judgment in favor of accountants and lawyers); Stokes v. Lokken, 644 F.2d 779, 785 (8th Cir. 1981) (attorney who prepared incorrect opinion letter on registration requirement of Section 5 not liable under Section 12). Cf. Ahern v. Gaussoin, 611 F. Supp. 1465 (D. Or. 1985) (attorney who directly solicits purchase may be liable under Section 12). /30/ We note that the Commission's view that aiding-and-abetting liability for aiding and abetting is appropriate under Section tend to private actions under other provisions that are not based on equitable rescission and that do not impose liability without regard to fault, such as Section 10(b) of the Securities Exchange Act, 15 U.S.C. 78j(b). Cf. Herman & MacLean v. Huddleston, 459 U.S. 375, 379 n.5 (1983); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 192 n.7 (1976) (leaving open the question whether civil liability for aiding and abetting is appropriate under Section 10(b)). /31/ We also note that the Commission need not show a financial benefit. See SEC v. North American Research & Development Corp., 424 F.2d 63, 81-82 (2d Cir. 1970). /32/ See also 3 L. Loss, supra, at 1716 n.105: "(A) newspaper which publishes advertisements in violation of Section 5 becomes itself a violator as an aider and abettor, subject to injunctive and criminal proceedings. * * * But it is hardly consistent with the statutory purpose that newspapers be subjected to civil liability under Section 12." /33/ In general, the courts have held that, to establish aiding and abetting liability, three elements must be proven: (1) a securities law violation by the primary party; (2) general awareness by the alleged aider and abettor that his role was part of an overall activity that was improper; and (3) substantial assistance by the alleged aider and abettor in the violation. See SEC v. Washington County Utility Dist., 676 F.2d 218, 224 (6th Cir. 1982); Cleary v. Perfectune, Inc., 700 F.2d 774, 777 (1st Cir. 1983); Investors Research Corp. v. SEC, 628 F.2d 168, 178 (D.C. Cir.), cert. denied, 449 U.S. 919 (1980); Decker v. SEC, 631 F.2d 1380, 1387-1388 (10th Cir. 1980); SEC v. Coven, 581 F.2d 1020, 1028 (2d Cir. 1978); Woodward v. Metro Bank, 522 F.2d 84, 94-95 (5th Cir. 1975); SEC v. Coffey, 493 F.2d 1304, 1316 (6th Cir. 1974), cert. denied, 420 U.S. 908 (1975).